How online lenders attract and service the evolving SMB borrower

SMBs always need money to finance their businesses.

But how they shop for loans and their education about finance has changed.

Michael Deleon | March 13, 2019

Some of the challenges small businesses face never go away. They’re perennially strapped for cash as owners worry about whether they’ll be able to keep the lights on the following month. Small businesses continue to tap sources of capital as many online lenders continue to enjoy record levels of underwriting.

But while small businesses still struggle with cash flow, how they shop for loans and their level of financial education about their options are changing. On Tearsheet’s recent webinar with leaders at Kabbage, BlueVine, and Intuit’s QuickBooks Capital, we discussed the changing nature of the SMB borrower and how their firms have evolved to keep up.

Kabbage co-founder and CEO, Rob Frohwein

“The business customer has definitely changed. We’ve also changed our offering. When we first launched, we were lending to eBay business. Now, we lend to all small businesses: whether they sell products or services, whether they’re in retail or professional services. Our borrowers have gone from very small online sellers on marketplaces like eBay and Amazon to much larger businesses.”

“It’s changed pretty dramatically over time. Our business has also changed over time. We started with lines of credit that went from $2,000 to $12,000. Now we go up to $250,000.”

“We’ve kept the product fully automated. Even a company that qualifies for $250,000, the experience is still the same. It’s still six or seven minutes from the time they land on our site until they can draw cash. We tried to keep this experience consistent. We found that even to service SMBs of this size, we still need to keep it automated and keep the business owners focused on what they do best which is really running their businesses.”

Eyal Lifshitz, founder and CEO, BlueVine

“Small business owners are becoming more sophisticated. They’re becoming more aware of the different products and options they have. Five and a half years ago, when we introduced factoring, we had customers come in the door that didn’t have invoices or receivables. They were just looking for money.”

“Over time, we’ve seen businesses begin to grasp the different types of financing like loans, inventory financing, merchant cash advance, and factoring. They understand that one type of financial product isn’t necessarily better than any other — it’s just that they’re more appropriate for specific types of situations or small businesses.”

“For us, that’s been guiding us to building more products. We started with factoring and a line of credit. Now, we’re introducing our third product in about a month. We need to make sure we have the right product at the right time.”

“The second thing I’d mention is that when we launched five and a half years ago, online wasn’t the primary way SMBs began their borrowing journey. They’d start with their bank. Now, we’re seeing businesses that don’t look at online lending as a fallback. They’re starting their journey and doing business with online lenders. They’re bankable and have bank financing and come to us because we provide faster and easier service.”

Luke Voiles, business leader, Intuit’s QuickBook Capital

“SMB owners always look very similar. They always have the same pain points and the same struggles, like how am I going to make payroll next month. The biggest difference is the data, data infrastructure, and the ability to use alternative data sources to underwrite customers.”

“I’ve used this analogy before. Banks needed two years of audited financial statements and tax returns to see a trended and validated view on a small business. The data that digital lenders like us use are at the transaction level of detail that are much more real time. After a customer consents, we have QBO transaction data, payments transactions for cash we’ve moved for our customers — the highest validation you can get. What’s changed is the ability to triangulate and get to a trended view of a business from the data which is so much more granular.”

“For us, 40 percent of the businesses we’ve made loans to have been in business for less than two years. It’s a market that’s completely underserved. Fintechs can service some of these populations that banks wouldn’t touch in the past. It’s a trend where businesses turn to tools to automate more of the back office like regulation, tax, and accounting tasks, and making that data available for third parties to assist them and make things easier for them.”

“Being able to automate the application process from the data we have on our customers is just a great customer experience.”